Global Economics

Chinese Economic Retooling Will Take Time

Weakening consumer confidence shows domestic demand may not be able to fill the gap left by the drop in China's exports

The latest set of GDP figures from China have confirmed the widely held belief that the economy is slowing, and slowing fast. In the fourth quarter of last year, the economy expanded by 6.8% year-on-year, the slowest growth since the fourth quarter of 2001, and significantly less than the 9% growth recorded in the previous quarter.

With global trade evaporating, China's economy must find less sustenance from exports, and more from domestic consumption. This is not a new idea—for years observers have pointed to China's over-dependence on exports. The effect of the current economic downturn is that the need for a change in focus has become more pressing.

The bad news is that China's consumers might not be there to fill the gap. A survey of consumer confidence in China conducted by Macquarie in December, and released mid-January, suggests that spending is expected to weaken. Confidence is important because if people are nervous, their savings will sit in bank accounts, contributing to deflation; while if they are more bullish, they are more likely to put money into stocks and shares, helping to revive the flagging economy.

The survey—which involved interviews with a total of 500 people in Beijing, Shanghai, Guangzhou, Xi'an and Chengdu—found that most people were aware of the subprime crisis in the US, and around 70% of those believed that it was detrimental to the Chinese economy.

The perceived short-term effects were less evident. When asked about how their economic situation had changed over the previous three months, twice as many said that things had become worse rather than better, but over 70% felt no change. A similar majority expected things to remain the same over the next three months, with 20% expecting things to get better and 20% expecting things to get worse.

Some discretionary purchases are under threat: more than 25% of those interviewed said that they expected to cut purchases on clothes, dining out, and travel.

Just because people are spending less doesn't mean that all the money needs to go into the bank—it could be invested instead. The survey however found little confidence in property prices, which over 55% of respondents saying that they expected prices to drop over the next three months. And when asked about share prices, most were uncertain over the future of the stockmarket. Nearly all the people interviewed were not planning to dip into either property or stocks over the next three months.

Another factor that will affect spending is the level of employment, and the news is not good there either. The results of a survey conducted by one of China's largest job websites, 51job.com, shows that people are scared about their jobs: 23% said that their company was already laying people off or not renewing contracts and 42% thought that they might be laid-off this year.

Though, Matthew Crabbe, managing director of market intelligence company Access Asia, says that, where it matters, consumption is holding up; and the increased focus on domestic spending is part of an overall plan of the government to slow down the economy and provide quality over quantity.

"The development of the domestic consumer market was always a part of that retooling plan," says Crabbe, "and has remained robust, especially away from the fanfare galleries of Beijing, Shanghai and the other shop-window cities. We are seeing consumption through retail sales picking up in tier-two [cities] and below, and this is where the domestic economy needed to be accelerated anyway."

"The Chinese economy does not need either saving or propping up, it needs rationalising and adjusting. This will mean short-term pain in certain sectors, leading to job losses in certain sectors and regions. But such pain, as witnessed before in 1997 and 1998, need not be a catastrophe, and as that previous period showed, can produce a much more robust economy on the other side."